Islamic insurance on the rise

Insight Takaful, Sharia-compliant insurance, is growing in prominence across the region as demand for the product increases.

Demand for Islamic products has driven the rise of Takaful, say experts.

Chakib Abouzaid does not like playing the part of the outcast. Nor does he want his burgeoning business of takaful, or Islamic insurance, to be marginalised as something separate from the large global insurance providers that now dominate the scene. "Takaful is not a ghetto and I don't like to work in a ghetto," says Mr Abouzaid, the chief executive of Takaful Re in Dubai, the first takaful reinsurer of its size in the world. "Takaful companies are mature companies. We are also part of the insurance industry and I think we are contributing to the development of the insurance industry."

In many ways he is right. According to a report last October from Swiss Re, the world's second-largest reinsurer, the takaful sector grew at an annual average of 25 per cent between 2004 and 2007, adjusted for inflation. The rest of the insurance industry grew at slightly more than 10 per cent a year in that period. But takaful's fast expansion has not come without growing pains. It still makes up a mere sliver of the global insurance pie, and only in the past five years has it begun to gain ground in the GCC, riding on the development of Islamic finance as a whole.

Figures on the industry are scant but one estimate last year said there was US$500 billion (Dh1.83 trillion) in Islamic bank assets worldwide, a small portion of the global figure. But Accenture, the global management consultancy, forecasts that household Islamic savings will amount to $24bn a year by 2020. "Takaful penetration is still marginal," Mr Abouzaid says. "It is still very small but definitely we are contributing to increase the penetration.

"In the past three or four years, all the new insurance companies in the Gulf area have been takaful companies. Nobody is starting a conventional company. It's a very simple strategy: if some segment of the population is reluctant to buy conventional insurance, why not provide takaful insurance?" Like many Islamic finance products, takaful first took hold in South East Asia, thanks to strong government support. In Malaysia, overall insurance penetration in 2006 amounted to about 5.4 per cent of GDP, well above the figure for the GCC. Insurance penetration in the UAE was just 1.53 per cent in 2006.

According to figures from 2005, Arab countries accounted for just 24.7 per cent of total takaful contributions, while countries in the Far East - including Iran - accounted for 75.1 per cent. But takaful is growing in the region, thanks to government encouragement and rising oil prices that are helping spread wealth through the region. Saudi Arabia's co-operative companies law, passed in 2004, required firms to operate along Islamic principles. Iran's companies are also legally bound to use Sharia-compliant financing, which has helped takaful penetration rates to rise there.

Yet central among its hurdles is the underdevelopment of the reinsurance industry of which Mr Abouzaid is a part. Insurance companies, especially new ones, cannot survive without a mechanism to offload the risks they take on to larger companies with larger asset bases to absorb claims. That is where reinsurance comes in. In the takaful sector, however, there are not enough large reinsurers to underwrite all the risks takaful companies take when they sell products.

Re-takaful has developed rapidly, industry insiders say, but most takaful companies still reinsure contracts using conventional, non-Islamic means. "We're looking to create that capacity or to find that capacity, and in the absence of finding that capacity in the market we have to rely a lot of times, and I'll state it as unfortunate, we have to rely on conventional reinsurance," says Abdallah Kubursi, the head of AIG Takaful, which is also based in Dubai and which started three years ago.

Conventional insurance is incompatible with Islam because of Sharia's prohibitions on overly uncertain transactions that involve a strong element of luck. Conventional insurers also put large pools of money in interest-bearing investments, which are prohibited by Islamic law. This state of affairs does not sit well with the Sharia boards that oversee takaful companies. But for now, Sharia scholars recognise that takaful-based reinsurance is not always available. They are pushing takaful firms to do their best to switch to re-takaful as capacity grows.

"It is not purely Sharia-compliant to reinsure using conventional reinsurance," says Michael McMillen, an Islamic finance expert. "However, these are early years in the growth of the takaful business and Sharia-compliant re-takaful is not always available. "Thus, the Sharia scholars with whom I have spoken on this matter have permitted reinsurance with conventional reinsurers in the short term. As re-takaful becomes available, use of those re-takaful providers would be required."

The development of re-takaful in the past three years, helped along by the emergence of companies such as Takaful Re, which was capitalised with $250 million when it started in 2005, is proceeding apace. Insiders say that for many types of risks, the capacity is already there in the re-takaful market. Motor takaful, for example, is almost completely covered by re-takaful companies. Capacity is still lacking, though, when it comes to large, extraordinary risks.

"When you look at lines of business like financial lines, crisis management, sabotage ? kidnap and ransom, directors' and officers' liability insurance, and so on, a majority of the re-takaful companies out there today do not really have capacity for those lines of business," Mr Kubursi says. For takaful to succeed in the long run, these issues must be worked out. It is unclear how long Sharia boards will tolerate the use of conventional reinsurance.

But takaful is growing so quickly in the GCC that it has become difficult even for large global insurers to ignore. Many global banks and financial institutions have been busy making partnerships with takaful providers to include Islamic insurance among the coverage they offer. Last week, Mashreqbank began offering a takaful-based savings scheme to its customers, and Dubai Bank announced a partnership to offer takaful products with Salama, an Islamic insurer based in Dubai.

Practitioners say the industry in the UAE could be helped greatly by a formal endorsement from the Government, or by laws that require companies to use takaful instead of conventional insurance. At the pace at which it is now growing, though, it may only be a matter of time before takaful becomes a global force, whether the Government helps or not. "In the Middle East we are still fighting, because there is a difference in terms of maturity between Malaysia and the Far East and the GCC," Mr Abouzaid says.

"Now we are working to convince the Sharia boards and the management of the companies to switch to re-takaful because, in fact, they have no choice. "From a Sharia point of view, they have to limit their use of conventional insurance to the strict minimum." [e-mail]